Mr. Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, commentary on RBI Monetary Policy

The RBI delivered a textbook policy announcement today – one that is frontloaded and aggressive in response to inflation that remains high while the growth momentum remains reasonably positive.  Accordingly, the RBI kept its inflation forecast unchanged at 6.7%, sounding caution on uncertainty around inflationary pressures despite the recent moderation in global crude oil and metal prices. The central bank kept its stance unchanged at “withdrawal of accommodation” signalling yet again that the notion of stance is being defined by the liquidity in the system and in turn the overnight rate.

Unlike previous policies, the central bank also focussed on the resilience of external balances implicitly communicating its preference for not just a less volatile rupee but also perhaps some resistance towards very sharp depreciated levels of the rupee.

We expect the RBI to continue with its rate hikes in the upcoming policies taking rates up to 5.75% by the end of the year. The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4% by the end of the quarter as markets reprice in RBI action and the supply of both SDL and central government bonds this year.